Friday, February 21, 2014

My View

Random ruminations from your resident curmudgeon...

It would be easy to overlook this news item with all the noise out there, but California is in the midst of its worst drought since the mid 1800's. Cal Berkeley professor Lynn Ingram says that we have not seen a drought this bad in California in our lifetime.

Ingram is a paleoclimatologist and is involved in studying climate change over long periods of time using the record left behind in fossils, tree rings, and other organic evidence. Dr. Ingram is not one to overstate her observations that the current drought affecting California and the southwest will get worse.

History backs her observations.

According to Dr. Ingram, the southwest and most of California have experienced drought like conditions that have lasted more than 200 years. There have been intermittent periods of drought that have lasted for decades.

Why bring this up?

California produces the most vegetables of any state in the U.S. Consider what California produces:

99% of all artichokes

89% of all cauliflower

90% of all leaf lettuce

86% of all lemons

88% of all strawberries

84% of all peaches

67% of all carrots

33% of all tomatoes

94% of all broccoli

just to name some of the crops that we get from this area.

Drought conditions have spread throughout the southwest, although they are most severe in California, these conditions do not just affect row crops like those mentioned. The size of the U.S. cattle herd has been shrinking for the past 7 years, and at the end of 2013, was the smallest it has been since 1951. Keep in mind that since 1951, the population in this country has doubled, and demand for beef products has grown proportionately.

These conditions have created a growing shortage in certain crops, and we all know what happens when there is limited supply and consistent or rising demand.

Prices go up.

Since 2011, poultry prices are up 18.4%; ground beef is up 16.8%; and bacon (YUMMY BACON!!) is up 22.8%. Milk prices are up more than 100% since 2008.

Just about every food category has experienced a double digit increase in price over the past five years, even as the government tells us that inflation is "benign".

Consumers know that inflation in food costs is anything but benign.

Take a look at this chart:

This chart from the Federal Reserve shows the increase in the Consumer Price Index since the late '40's through the end of 2013. I would suggest that this understates the true level of inflation, but even if not, we can see that consumers are paying more- a lot more- to maintain their standard of living.

Now take an environment where there is a consistently rising cost of living and couple it with this:

Uh... Houston, no, Washington, we have a problem.

Over the past five years, inflation, which can be thought of as an increasing cost of living, has gone up an average of 1.8% per year. Over the same period, real household income has fallen 2.1% per year.

You can immediately see the problem. We are spending more just to maintain- not increase- our standard of living and at the same time, our incomes are falling.

This is not a formula for good economic health, either at the family level or as a nation.

As individuals, we have to know that our cost of living is going up, irrespective of the misinformation from Washington, and it is going up much faster than what is being reported. We have to prepare financially and be disciplined to keep our expenses under control.

We also have to demand that Washington create an environment where we as a country can move back to full employment and where wages are not being constricted by undue taxes or regulatory burdens. Wages have fallen because employers are cutting back hours and benefits and are not hiring to avoid mandates from Washington.

This situation is dangerous for our country financially and it does not portend strong economic growth in the future. Heck, this scenario says there will be no growth in the future.

Given this, we must all prepare financially for a protracted period of time where incomes are going to struggle to grow and prices are going to increase.